December 21, 2013 4:47 am JST

Japan's fiscal 2014 budget signals renewed pressure for spending

TOKYO -- The Japanese government's commitment to curb spending appears to be falling by the wayside, as evidenced by a record national budget for next fiscal year worked out by lawmakers and bureaucrats.

     The fiscal 2014 general account budget, to be approved Tuesday by the cabinet, is expected to reach an all-time high of 95.9 trillion yen ($909.9 billion), a 3.6% jump from this fiscal year's initial budget.

     In crafting the budget, the government sought to strike a balance between fiscal consolidation and economic stimulus in light of the consumption tax hike scheduled for next April. Apart from special factors such as the consolidation of special accounts and an increase in social security spending to be financed by the sales tax hike, the government will generally keep expenditures below the current-year level. But it could not fend off pressure to increase spending in such areas as medical treatment fees and public works projects.

     On Friday, Finance Minister Taro Aso and Health and Welfare Minister Norihisa Tamura approved a 0.1% increase in reimbursements to hospitals and clinics under the national health insurance program, a major source of contention. Aso had tried to keep the fees unchanged, warning of "an added burden on the people," but ultimately approved the small increase. Social security outlays will swell 5%, topping the 30 trillion yen mark for the first time.

     Public works expenditures are on track to jump 13% to 6 trillion yen or so, rising for a second straight year. The growth also reflects higher purchasing prices for materials and other items after the consumption tax hike.

     Spending to expand the shinkansen bullet train network will grow for the first time in nine years. And reflecting concern in the prime minister's office about a growing security threat from China, Japan's defense budget will rise 2.8% or so, the second straight year of increases.

     The roughly 1 trillion yen in outlays designed to underpin regional economies after the Lehman crisis will be trimmed by 400 billion yen or so. The Finance Ministry had sought to eliminate the category entirely, but instead plans to phase out the program to blunt the impact on localities still feeling an economic pinch.

     On the revenue side, the consumption tax hike will add more than 4 trillion yen to the coffers. Corporate tax revenue is expected to reach 50 trillion yen, surging nearly 7 trillion yen from fiscal 2013. New government bond issues will be reduced by 1.6 trillion yen, or 4%, to 41.3 trillion yen.

     Higher tax revenue, 4.6 trillion yen in nontax revenue and other factors will help shrink the primary balance deficit by 5.2 trillion yen, outpacing the government's medium-term goal of trimming it by 4 trillion yen from fiscal 2013. Japan would also move a step closer to achieving its pledge to the international community to halve the deficit by fiscal 2015.

     But observers believe the government should do more.  "The smaller primary balance deficit reflects a reliance on tax revenue, while the government hasn't done enough to reduce spending," says Masahiro Nishikawa at Goldman Sachs Japan Co.

     The government needs to craft a solid strategy for growth and focus more on fiscal consolidation instead of spending, asserts Masaaki Kanno at JPMorgan Securities Japan Co.